A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘culture’

A post-corona legal world: more kindness, less paper

In Articles, Commentary on 4 April 2020 at 4:45 pm

Full text of opinion piece first published in the Australian Financial Review on 2 April 2020.

At some point later this year or early next we will move into a post-Corona world. What might that world look like from a law firm perspective? On my reckoning, it will involve deeper relationships, less paper and more flexibility.

Deeper relationships

There is much research that shows that people that go through acute stress together come out at the other end with stronger relationships. War is one of the greatest stresses anyone could ever encounter yet it also often leads to deep human friendships and incredible acts of heroism and sacrifice.

As Stanford’s Emma Seppala states, “Understanding our shared vulnerability — that life makes no promises — may be frightening, but it can inspire kindness, connection, and desire to stand together and support each other.”

To illustrate this point, I heard a story this week of a law firm partner checking in every day with every person in her team via Zoom. These check-ins covered some work matters but mostly were about sharing the fears, loss, grief and the black humour of the pandemic and the remote working experience. She said she encouraged her team members not to avoid interruptions from partners, kids and pets during the video calls.

The partner indicated her surprise as to how deeply personal the conversations had become, and how much closer she felt with her team members. Seeing her team members at home interacting with loved ones added a whole new level of understanding and appreciation of them as individuals.

She imagines a post-corona world with much deeper social connections – with staff and clients. Going through a crisis together can help engender trust and understanding, the foundations of all solid business-to-business relationships.

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Source: AFR

Less paper

Over the past decade, many law firms have invested in sophisticated and expensive document management systems to reduce paper, streamline processes and improve control. It is a common experience that firms don’t realise the full benefits of these systems because a small group of lawyers, often senior partners, refuse to change their habits and prefer to edit in hardcopy only and/or keep paper copies of everything.

The coronavirus has forced some law firm partners to change their rusted-on work habits in about one week. When the hardcopy file is inaccessible and no assistant is at their side, only then will the penny really drop that a change is required and the painful process of stepping outside comfort zones will commence.

In a post-corona world, there will be less paper and greater compliance with enterprise-wide systems that promise so much but often deliver less. Allied to this there is likely to more defined workflows, greater support for cloud-based applications and better use of deal platforms.

As legal project management expert Ron Friedman notes, “Litigation and investigations have long employed [and co-located] armies of contract lawyers to review documents for responsiveness and privilege… The technology exists for secure, remote document review. Though supervision and collaboration may be harder working remotely, it does tap a much broader labour pool [and meet social distancing rules].”

More flexibility

Pre-corona, flexible working arrangements were mostly the exception rather than the rule in law land. The past two weeks have reversed this statistic.

The generally positive experience of meeting via videoconference, accessing files remotely, collaborating online on shared documents and engaging staff and clients virtually has brought a new realisation: actually, we don’t need everyone at the office all the time. If people want the option to work flexibly it can be done without destroying productivity or team dynamics.

While I don’t foresee a shift post-corona to complete remote working or agile office set-ups (that is, an office with no allocated desks), I would expect firms to be far more comfortable with people seeking flexible work arrangements that include some regular time working from home or other locations outside of the office.

Remote working must be balanced with having a team congregate in one space to collaborate to solve complex client problems, to share knowledge and to socialise. There is still no technological substitute for face-to-face interactions and the serendipitous opportunities that come from overhearing conversations – and unexpected bumping into colleagues in corridors and kitchens.

In conclusion

In conclusion, the post-corona legal world will be different. While there’s a lot to fret about, there are also some important positives to reflect and focus on.

Five ways to improve your firm’s balance sheet

In Articles, Commentary, Legal Technology on 8 February 2020 at 4:19 pm

Full text of my opinion piece first published in the Australian Financial Review on 7 February 2020.

Law firm partners focus a lot their profit and loss statements but tend to glance over the asset section of their balance sheets.

This is a missed opportunity.

There are three main reasons assets are largely ignored. Firstly, in ‘zero-in zero-out’ partnerships with 100% dividend payout ratios tracking long-term asset value is relatively less important. Secondly, in some firms, the accountants lump all intangibles into a vague and unhelpful construct called ‘goodwill’. And thirdly, balance sheets tend to list boring things like plant and equipment.

AFR 7 Feb 20 Balance Sheet

Original AFR article

From a strategic management perspective, there is a significant benefit in framing goals around making the firm more valuable. This means identifying all the assets, both tangible and intangible, that the firm uses to create and sustain value.

A more detailed balance sheet can also be useful when it comes to partner performance management. Growth in asset value should be the heart of what’s expected of partners, especially in regard to their non-financial contribution.

Tangible assets are easy to quantify. The intangibles less so.

Here are five important intangible assets in your firm that are worth measuring, protecting and leveraging.

#1 Relationship capital

Relationship or social capital refers to the strength and stickiness of existing client relationships and, where relevant, referrer and community connections.

While there are no simple measures of relationship capital, good proxies include total client lifetime value, client commitment indices, net promoter scores, client loyalty rates, average service mix per client, share of wallet of platinum and gold clients, social network strength and percentage of sole-sourced work.

#2 Human capital

Human capital refers to the quality, performance and commitment of all partners and staff. Management reports often include data on salaries, recruitment, training and turnover, but these don’t get to the heart of tracking human capital growth or depletion. Additional measures might include:

  • Toe-to-toe analysis comparing the quality of key practitioners in the firm versus direct competitors
  • Loyalty and career intention indicators
  • Succession and talent development pipelines by practice area
  • Diversity and inclusion metrics
  • Glassdoor, Seek and social media ratings
  • Employee net promoter scores
  • Leadership capacity and capability
  • Culture maps, highlighting hot spots or blind spots
  • Real-time measures around staff morale, firm climate, employee experience and discretionary effort.

#3 Brand capital

This refers to the strength of the firm’s brand and reputation in key target markets. Traditional measures include brand awareness, consideration, preference, use, board room impact, recommendation and social media following. An ability to attract star recruits is also an indicator of its brand capital.

One benefit of a strong brand is the ability to command a price premium. By way of example, in 2019, Apple’s brand premium enabled it to capture 66% of smartphone industry profits, 32% of overall market revenue while only selling 13% of total handset units.

Proxy measures around the firm’s pricing clout impact might include the percentage of bids won where the firm was priced higher than competitors, depth of discounting and percentage of matters with supernormal margins.

#4 Data capital

Most firms are sitting on mounds of valuable data with most of it stored on disconnected databases collecting digital dust. The main data islands include:

  • client data such as matters delivered, interactions, service feedback, event participation, agreed pricing and billing,
  • staff data such demographics, salaries, tenure, engagement, training, feedback and performance records,
  • operational data such as time records, matters processed, productivity and utilisation, and
  • financial data such as revenue, margins and expenses.

Joining these data sets and applying some smart predictive analytics will allow firms to make much better decisions. For example, the analysis could point to using a specific team with a particular process to do a specific type of matter for a certain client category using a defined pricing model. Each of these choices might mean a 2% improvement, but accumulatively you’re looking at +10% gain without working any harder.

#5 Intellectual capital

The last category is for important bits of firm know-how that don’t neatly fall into one of the other four areas. This might include the proprietary legal products, algorithms, websites, domain names, precedents, templates, applications, patents and trademarks.

Growth in intellectual capital could be assessed by things such as the firm’s investment in research and development and its innovation portfolio. Quantifying the revenue from new products and services can indicate success or otherwise in this asset class.

A call to action…

Take a quick glance over your firm’s strategy papers and board reports over the past 12 months. Is there a way to elevate your firm’s strategic thinking by delving into the intangibles that will sustain your long-term success? I bet there is.

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Is bigger better?

In Articles, Commentary on 13 December 2019 at 7:20 pm

Full text of my opinion piece first published in the Australian Financial Review on 12 December 2020.

Ranking law firms by size implies in some way that second position is better than 22nd. But is it?

As with many things in the legal business world, the answer is not straightforward.

Gilbert + Tobin is a wonderful case study of a relatively small firm – only 16th in The Australian Financial Review Law Partnership Survey – competing very successfully in every market it chooses to focus on.

The firm is widely recognised as a powerhouse in corporate, banking and dispute resolution and is one of the most profitable commercial firms in the country.

In the US, Wachtell Lipton Rosen & Katz has only 260 attorneys but is No. 2 on the Vault table of best places to work for graduates, first for mergers and acquisitions work and generates in excess of $US6.5 million ($9.5 million) per equity partner per annum.

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AFR print edition

Russell McVeagh is regularly ranked as one of the top firms in New Zealand. Their website lists only 36 partners which makes it the smallest firm among its peer group by a significant margin.

Despite these compelling examples, there are four areas where it appears bigger is better.

Lower-cost operators

Australia’s largest partnership, HWL Ebsworth, offers partner rates at 30 per cent – 40 per cent discount to comparable firms. It is able to sustain these rates by having a low-overhead operating platform, maximising the utilisation of it, and consistently increasing the number of partners sharing its cost. Size does yield economies of scale to HWL Ebsworth and others that have adopted this model.

The general insurance market in Australia has converged significantly over the past decade with four major companies now enjoying market dominance. The flow-on from this trend has meant that law firms specialising in insurance have had to get bigger to match the buying power of their key clients. Size helps these firms meet the unrelenting client demands for lower cost legal services and still make a buck, just.

Large matters

Clients do seriously consider the size, or “bench strength”, of the legal teams that compete for large-scale transactions, major projects, investigations or litigation work. Clients want the assurance that there are ample resources in place to manage large workloads without a hitch. They also seek to limit the risk of being reliant on just one or two key individuals; they want the B-team to be just as good as the A-team.

A large practice team also helps firms cope with the volatility of demand. A larger team can smooth out the peaks and troughs over a wider base of work. A smaller team runs a bigger risk of boom-bust actually meaning bust.

Innovation

Many of the new legal technology products that are emerging are based on cutting-edge cognitive technologies. The rough rule of thumb is that 70 per cent – 90 per cent of new products fail. Firms need to be of sufficient size with sufficiently deep pockets to be innovators and wear the cost of failure.

One of the key success factors in legal product innovation is effective distribution. Large firms with a wide reach will clearly have a market access advantage relative to say a smaller firm or a start-up offering a similar application.

Firm size also helps in taking a few more risks when it comes to lateral hire or practice acquisition. Recruiting a cultural terrorist in a small firm can be an existential problem. Larger firms tend to have more options and a bit more resilience to bad hire decisions.

Client panels

Many large corporate and government buyers of legal services have reduced the number of business law firms on their legal service panels.

A byproduct of this trend is that firms of scale, range and reach are often preferred to specialist boutiques. To target this market segment, law firms need to grow to ensure their full-service value proposition remains credible.

In conclusion

So, is bigger better?

Larger firms will generally point to their strengths in critical mass and coverage. Smaller firms will make the most of their focus and agility.

It appears they are both right.

Why culture really really matters

In Articles, Commentary on 20 October 2019 at 2:41 pm

The full text of my opinion piece first published in the Australian Financial Review on 18 October 2019.

‘Culture eats strategy for breakfast’, is a frequently cited quote attributed to Peter Drucker.

My recent experience with three firms suggests that Drucker, whom some call the father of management thinking,  might just be right.  These firms have consistently outperformed their peers and recorded double-digit profit growth. This success has come without superstar rainmakers, with undistinguished brands and with no fancy-schmancy disruptive business models.

So, what is it that has made them so successful?

Headline

Original AFR article

It appears to me that the secret lies in their organisational culture, that is, the set of shared assumptions, values and beliefs that underpin how people do their work and relate to each other.

It’s their implicit management system that creates order and provides inspiration without the need to codify each and every activity.

I posit that there are seven areas where culture really matters.

#1 Productive politics

In firms with highly politicised cultures, enormous energy is expended addressing internal matters like who takes credit, who earns what, who ‘owns’ which client and who can and can’t work for whom. Power struggles and infighting between divisions, office locations, practice team and individuals distract from time with clients and staff.

A managing partner of a leading law firm once revealed to me that he spent around 40% of his time making and justifying partner remuneration decisions. In other words, splitting the pie, not expanding it.

#2 Collaboration

Research by Harvard’s Heidi Gardner reveals there is a significant financial upside when partners work together to solve wicked client problems. She distinguishes this kind of integrative collaboration from cross-selling. The former is about drawing together a diversity of knowledge and experiences to add value to clients, the latter is merely an arms-length referral to a colleague.

#3 Consistent high standards

In a recent panel discussion, I asked three General Counsel what distinguished top firms from the rest? ‘Consistency’ was the universal response. Leading firms were characterised by extremely high technical and service standards delivered consistently by all staff at all levels.

Successful firms are those that have cultures that are intolerant of mediocrity and expect, and get, high standards from everyone.

#4 Discretionary effort

Organisation cultures that are perceived to be purpose-driven and genuinely caring, trusting and fair tend to get the best out of people. Staff are more likely to go the extra mile, to act above and beyond the call of duty, or just do that little bit more. Toxic cultures often result in lower productivity, higher absenteeism and substandard output.

#5 Continuity

Continuity builds deeper client understanding and fosters trusting relationships. In a study in a large bank, the researchers found that where a client had five different relationship managers over a two-year period only 40% of clients were satisfied. This jumped to over 80% where there had been only one relationship manager.

Positive firm cultures facilitate retention and ensure continuity. A stable workforce also reduces the direct costs associated with staff churn.

#6 Self-management

Each of the three firms mentioned in the introduction is characterised by a lean management structure. All senior people, but excluding the managing partner, still retain significant practices. Each team within the firm has an ethos of self-sufficiency. They don’t see themselves as paralysed subordinates waiting for orders.

Alignment around firm direction, trust in leadership and a strong culture provide the glue that binds the collective but at the same time encourages individual empowerment.

#7 Accountability for action

Strange as it seems but many firms struggle with simply doing what they say they will do. An accountability culture is one where there’s a bias towards keeping promises and there’s less denial and deflection in cases of inaction. Successful firms have the disciplines to implement strategy and the fortitude to overcome obstacles that might emerge.

In conclusion

It is common for law firms to describe their cultures as ‘collegiate’, ‘respectful’ and ‘friendly’. In these tough times, I don’t think just being nice is going to be enough.

It is incumbent of every professional service leader to strive towards a cohesive, productive, healthy and disciplined culture.

This type of culture will take care of breakfast, but it will also allow the firm to have strategy for lunch and glass of the finest champagne over dinner.

Law firm partnerships could give BHP a productivity lesson

In Articles, Commentary on 7 September 2019 at 10:03 am

Full text of my opinion piece first published in the Australian Financial Review on 6 September 2019.

CEO Andrew Mackenzie and the top 200 global executives at BHP Billiton do not dig for iron ore, or cart coal, or drill for oil. They are 100 per cent dedicated to the task of leading and managing their company.

In contrast, almost all of the top 200 global partners in Herbert Smith Freehills (HSF) are involved in legal service production in some way. This includes advising clients, supervising the legal work done by juniors and pursuing new opportunities.

A BHP vs HSF comparison points to one of the key differences between law firm partnerships and corporations; almost all senior people in law firms have a producer-manager-leader (PML) role.

As producers they win and deliver legal work; as managers they organise and control people, processes, resources and facilities; and as leaders they help set direction, align constituencies, innovate and inspire others to perform at a higher level.

There is strong evidence that most law firm partners bias production over their management and leadership roles. The reasons for this are both structural and personal.

Proof of legal excellence and client followership are the most common ways people get promoted. Production-related outcomes are the things that are celebrated and rewarded – acquiring new clients, winning high profile cases, beating budgets, winning awards and ranking higher in directories.

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Entitled Millenials

Ask partners what they enjoy the most in the job, the most common response is helping clients solve really important complex problems. The thing they enjoy least is dealing with entitled millennials.

As the business of legal becomes more complex and competitive, so does the importance of effective leadership and management.

As firms grow there are more cats to herd.

As legal technology evolves there are bigger strategic bets to place.

As client expectations and sophistication rises, so firms have to deliver more for less and still make a buck.

As younger lawyers leave the profession in droves, firms have to do much better at engaging top talent.

One obvious solution to deal with this production-bias is to employ full-time specialised managers and leaders and let the lawyers just do law.

This thinking is seriously flawed.

Rather than blindly follow what corporations do, law firms should wholeheartedly embrace the PML model and just work harder at addressing the problems listed above.

Empowered self-managed teams

PML results in law firms being run as a network of highly empowered self-managed teams. There’s no middle management pushing papers and inventing new reports. There’s no CBD head office tower filled with bureaucrats. There’s no intricate incentive system to extract more discretionary effort from senior executives.

In the main, premium law firms are highly profitable perpetual engines of productivity. As an organisational form, traditional partnerships create wealth, share wealth and reduce risk very effectively.

Boris Groysberg of the Harvard Business School mentioned during his recent Australian tour that many large corporations are in fact trying to move towards the PML model. They see the obvious benefits of reducing overheads, fostering empowerment and having executives much closer to customers.

The key lesson is for law firms to reframe their whole talent system around the PML model. This means hiring more rounded legal graduates. It means providing non-legal training, especially in people skills, at all career stages. It means fast-tracking those with obvious leadership potential to senior roles more quickly. It means adding new elements to the symbols and measures of success.

It also means support for incumbent partners to better manage the trade-offs and tensions across their current portfolio of responsibilities.

The frequently cited claim that the partnership model is an anachronism is misguided. Having an empowered organisation with almost everyone on the tools in some way would make BHP’s Andrew Mackenzie think he’s discovered another Pilbara.

Firms pay price for poor HR record

In Articles, Commentary on 4 August 2019 at 7:22 pm

Full text of op-ed first published in the Australian Financial Review on 2 August 2019.

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Almost all large and mid-sized law firms have an in-house human resources (HR) team to handle recruitment, development, reward and other people issues. A high-performing trusted HR team is essential in winning the war for top talent.

Unfortunately, many firms are shooting themselves in the foot by having poor relationships in and around HR.

At its extreme, it goes something like this…

HR team members perceive their firm’s partners to be disrespectful, disempowering and ignorant of the value that HR professionals can really bring. They feel excluded from critical conversations concerning performance management, remuneration and workforce strategy, especially for partners and senior practitioners. They are frustrated by people that don’t show up to important HR-initiated meetings, and if they do, they’re there in body but not in mind or spirit.

One the other side of the fence, the firm’s partners have an ambivalent or even hostile attitude toward their HR team. They perceive them to be process-driven, uncommercial, reactive and superficial fad surfers. Partners discount their advice because HR team members appear to lack deep knowledge of firm economics, firm strategy and broader legal market trends.

The consequences

In practice, this chicken or egg standoff results in things like:

  • Being too slow to respond to new talent opportunities and missing out
  • Being unaware of flight risks and reacting too late
  • More ‘ow’ than ‘wow’ in employee experience
  • Low impact and clunky performance management
  • Incomplete HR data and unreliable analytics
  • Wasted training and development resources
  • Expensive HR practitioners doing low-level process work
  • Partners second-guessing decisions in areas they have little or no expertise.

Accumulatively these problems add cost and become a strategy handbrake. Over time, firms simply become less competitive.

Addressing the problem

There are five things firms should consider doing to address this problem:

1.    Call it out. The standoff scenario described above is extreme. This problem may only exist in pockets or not at all, but it’s good to know the truth. An honest and comprehensive review of what’s working and what’s not can isolate what’s really needed. This review should not be seen as a HR witch-hunt, but rather how the firm’s partners and the HR team can truly collaborate to give the firm a competitive edge.

2.    Improve the science. Many HR initiatives are (a little unfairly) perceived as soft and fluffy and requiring a big leap of faith when it comes to return on investment. Applying the principles and practices of data science to HR can set the stage for true impact. New HR initiatives supported by compelling evidence will get much greater interest and uptake. There are myriad of fresh valuable insights waiting to be discovered from mining HR data and especially in the linkages with financial, operational and client data.

3.    Calibrate risk profile. Many HR decisions come with big risks. For example, a bad new recruit can become a cultural terrorist, or a poor reward decision can lead to a regrettable departure. These risks push many HR teams towards being very conservative and opting for the path of least resistance. This approach can be sub-optimal especially if the firm is trying to innovate and create a growth culture. A joint effort by the firm’s leaders and HR to calibrate HR decision risks and policy will go a long way to avoid blame-shifting and getting strategic alignment.

4.    Create lateral leaders.  As with all business service functions, HR has lots of responsibility but with little or no formal authority. This means HR practitioners have to develop lateral leadership skills to work across the organisation as influencers and catalysts for change. They need to learn to lean-in and develop the personal gravitas to have their voice heard.

5.    Learn from IT.  Many law firm IT departments have moved to a co-sourcing approach with the outsourcing and automation of low-level process, support and compliance activity, and insourcing of high-level advisory work and R&D. The managed service model is maturing at a rapid rate and HR should embrace this trend to focus their energies in becoming true trusted advisors.

‘True trusted advisors’! Surely that’s a better vision than process-driven, uncommercial fad-surfers?

Five lessons from successful lawyers

In Articles, Commentary on 8 July 2019 at 9:14 pm

The full text of my opinion piece first published in the Australian Financial Review on 5 July 2019.

There are five stories worth retelling in comparing the 2019 AFR Partnership Survey to the one reported 10 years ago in July 2009.

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Original AFR article

#1 Resilience

Over the past decade, numerous commentators have predicted the end of BigLaw. Headlines such as, ‘Large law firms are about to have their Kodak moment’, ‘BigLaw is dead. Long live NewLaw’, and ‘Law is ripe for consolidation and disruption’ has attracted readers’ attention, but it is safe to say that these predictions have simply not yet come true.

Analysis of 2009 vs the 2019 Top 30 lists shows:

  • Average firm size is quite similar and there has been very little consolidation. In fact, the largest firm in the land by partner numbers was 297 in 2009 (Minters) compared to 266 in 2019 (HWL Ebsworth).
  • The business models of the Top 30 firms are by and large very similar to those from 10 years prior. They still operate within traditional professional partnerships, they make money through leverage of people, and they price directly or indirectly based on time.
  • While there are a number of global brands in the 2019 list, the Australian-based partnerships of these firms are still broadly the same set of people, putting aside obvious partner promotions and retirements. The vast majority of Australian legal work is still done by Australians in Australia.
  • For all the hype about the Big 4, PwC Legal does not make even it to the Top 30 list in 2019, and the other three are way behind.

#2 The shadow

In July 2009, DLA Phillips Fox had 164 partners and 434 fee-earners. It was the 7th largest firm in the land, the first trans-Tasman integrated partnership (excluding Perth) and a market leader in insurance, government and transport.

Ten years later the AFR Survey shows that DLA Australia has only 70 partners.

UK-based DLP Piper may be very happy with the slimmed-down version that their Australian branch office has become, but it seems amazing to me that nearly 100 of those original Phillips Fox partners who put up their hands to vote ‘yes’ for the DLA tie-up, left the firm they owned within a relatively short time period. Why did so many get it so wrong?

#3 Spot-changers

Much is said about law firms’ and lawyers’ resistance to change but it is worth highlighting the success that two firms are having in changing their gender profile. The 2009 AFR survey revealed that 16.3% of Allens’ partners were female. Ten years later this percentage is 33.1%. Over the same time period, Maddocks has shifted its female partners from 16.9% to 36.6%. Interestingly, the pioneer in this area, Gilbert + Tobin, has seen its proportion stay roughly the same: 36.2% in 2009 versus 35.7% in 2019.

The numbers do not reveal the specific strategies to become more inclusive, but they do show that a real commitment to a goal can make some leopards become less leopard’ish.

#4 The trainers

The firms listed in 2019 AFR survey hired 1,222 graduates over the past financial year. Most of these firms will spend the next three or four years of training these graduates to become independent legal advisers. Back-of-the-envelope calculations indicate that this is around 1.5 million hours of training at a rough cost of $90 million.

Assuming one-third leave the profession, the market cost of this attrition is $30 million. Assuming 20% go into in-house roles, the law firms are providing an $18 million training cross-subsidy to their clients (now how’s that for a value-add!). Assuming firms are expanding their training programs to include digital literacy and related topics, these costs are only going to escalate.

All this data points to the cost of not getting significantly better at talent management.

#5 New and old friends

The 2009 AFR listing included IP specialist firms Davies Collison Cave and Griffith Hack. Both of those firms are now part of ASX-listed entities and playing a very different game.

The 2019 AFR survey includes points to two emerging strategic groups:

  • The multi-disciplinaries or MDPs – firms that include significant consulting and adjacent (to legal) offerings. The standout members are the Big 4 legal arms plus Minter Ellison. Others that have a foot or toe in this pond include Corrs, Clayton Utz, Herbert Smith Freehills and McCullough Robertson.
  • The global boutiques – firms that are focused on just one or two service line or sectors in Australia and tied to a mothership back in UK or USA. Obvious examples include Seyfarth Shaw, Clifford Chance, Allen & Overy, Clyde & Co, Squire Patton Boggs, Jones Day, White & Case and Quinn Emmanuel.

In conclusion

There are lots of other interesting case studies behind the AFR surveys. They provide a rich history of our legal market and we should be very grateful to the participating firms and the AFR that the data is there to be shared and stories to be told.

Stop trying so hard to be different

In Articles, Commentary on 6 May 2019 at 4:33 pm

Full text of op-ed that first appeared in The Australian Financial Review on 3 May 2019.

99% of Australia’s full-service law firms have a strategy based on seeking clear market differentiation. In my view, they’re largely wasting their time and money.

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AFR Legal Affairs op-ed

Conventional strategy thinking suggests there are two sources of sustainable competitive advantage: [1] having the lowest cost, or [2] differentiating from competitors on things that matter most to customers. The former strategy allows firms to win by having greater price-setting discretion. The latter strategy allows firms to extract a price premium for added benefits.

When it comes to the legal market, this theory starts to get a bit wobbly.

Research shows that while most law firm clients can distinguish firms between groups of firms, such as Tier 1 versus Tier 2 or domestic versus global, they really struggle to clearly discriminate between specific full-service firms within a group. To clients, many of these firms look and feel the same.

One of the reasons for this is market fragmentation. Unlike most industries with three or four dominant players (think airlines, grocery retail or banking), the Australian commercial legal market has nearly 30 firms claiming in some way to be leaders in legal expertise and client focus. Australia’s largest law firm by partner number, HWL Ebsworth, has less than 5% share of the total market. Carving out and keeping a unique and relevant market position in such a crowded market is next to impossible.

Another reason for a lack differentiation is a self-inflicted one. Most full-service firms present themselves as being all things to most people. Within the partnership model it’s political suicide not to give every partner a guernsey in describing what the firm is really good at.

So, what’s the solution?

The first part of the answer is to worry less about being known for being different and focus more on just being known. Strong brand awareness still counts in opening doors and staying top-of-mind.

The second part is to encourage more differentiation at the practice, partner and/or product level. With a more micro approach, differentiation usually come from legal specialisation combined with a focus on a particular market segment or industry. So, for example, a general commercial litigation team can distinguish themselves by positioning as class action defence specialists for ASX200 companies.

The third element is to concentrate firm strategy on how the firm competes. ‘The how’ refers to the resources, skills, standards and systems used to win. These are collectively called capabilities, or as Pier D’Angelo, Allens’ Chief Strategy Officer, calls them, the organisation’s “muscles”.

Most full-service law firms need work on these five muscle groups and the inter-play between them:

1.   Firm and team leadership – setting and aligning everyone around a clear direction; inspiring others to meet/exceed expectations; and providing support with accountability.

2.   Talent management – recruiting, developing, engaging and retaining the right workforce for the firm to flourish, both now and in the future.

3.   Winning work and capturing value – developing trusting relationships with clients and referrers; converting more of the right opportunities; and pricing profitably.

4.   Collaboration – shifting the mindset from ‘my’ to ‘our’ client and combining expertise from inside and outside the firm to solve clients’ wicked problems.

5.   Operating with discipline – having an efficient and effective operating platform; ensuring adherence to agreed policies; executing plans consistently; and optimising leverage and utilisation.

Spending more time at the law firm gym will, over time, create a form of cultural and operational distinctiveness. Paradoxically, this will most likely be reflected externally and create a firm that both top clients and top people will want to work with and for. They will be authentic points of difference not created by spin doctors but radiating from a firm truly fit for the future.

Avoiding the Bermuda Triangle of law firm management

In Articles, Commentary on 2 March 2019 at 8:50 pm

Full text of my opinion piece first published by the Australian Finance Review on 1 March 2019.

Is your firm getting trapped in the Bermuda Triangle of law firm management? It might be and, worse still, you might not even be aware of it.

In the early 2000s, Professor Ashish Nanda of Harvard Business School commissioned a study to test whether the concept of economies of scale applied in commercial law firms?

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AFR print edition

He plotted profit per equity partner (PEP) against the number of fee earners for over 200 firms in the United States. The results disconfirmed the scale economy theory but revealed something even more interesting: PEP was relatively high for small boutique firms focused on specific market segments, and for very large firms who were able to compete for larger bet-the-company M&A transactions, projects and disputes. However, a majority of mid-sized firms had lower PEP relative to their much smaller and much larger peers. While the graph had dots everywhere, the best-fitting line looked like a large ‘U’.

Two theories were put forward to explain the U-shape. The first was that many of the mid-size firms found it hard to differentiate themselves and as a result were unable to secure a price premium. The proposition was these firms were in the ‘mushy middle’ losing out smaller and larger firms that were better positioned in the market. A deeper analysis of the data revealed high- and low-priced firms across all the three groups and therefore market differentiation was concluded to be a relevant factor but not the full story.

Growth pain zone

The second theory was that many law firm partnerships suffered heavily from growing pains. Small firms benefited from quick, informal decision-making and lean management processes. Large firms had the advantage of more mature and formal management practices and leadership capability. Problems emerged when shifting from small to large. Professor Nanda called this growth pain zone the ‘Bermuda Triangle of Law Firm Management’.

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The Triangle phenomenon can be explained as follows.

Growth in the number of fee-earners, office locations, service range and clients often results in more management complexity. There are more day-to-day decisions around who to hire, fire, promote, take leave, reward and sanction. There are more issues to deal with in regard to administrative processes, technology and systems. Marketing and business development decisions such as client pursuits, pricing and conflicts become trickier. At a strategic level, there’s more at stake when making major investment decisions and signing long leases for larger premises.

Many law firm partnership struggle with this increase in complexity. A common response is to allocate more partner time to deal with management issues. As decisions become more complex, more and more time is taken up in internal meetings and management conversations. Partners are drawn away from the things that matter most, that is their clients, prospective clients, referrers and people. Firms become internally-focused at the very time that an external market-orientation is most critical. This collective distraction has a material negative impact on firm performance and competitiveness.

With the noble pursuit of partner equality, fairness and sense of proprietorship many firms are reluctant to take away any decision rights from partners. With this approach, almost every decision, from the colour of sticky notes to staff parking policy needs consultation and consensus. This often results in extensive delays and lowest common denominator decision-making i.e. doing what all can agree on rather than on what’s right.

Major blind spots

In some growing firms, partners take on designated management role in key functional areas like HR, IT, Marketing and Finance. While this helps share the load very often the partners overseeing these functions have next to no training or experience in these areas. They have major blind spots and often make sub-optimal decisions that ultimately cost the firm. Even when firms hire specialist managers in these business support areas it is quite common for partners to second-guess these professionals and override their decisions.

The most critical element in navigating through the Triangle is effective leadership and followership. If the firm has a competent leader, they tend not to over-invest valuable partner time in governance roles, they make the right decisions quickly and implement them. Effective leadership builds trust amongst the partners who are happy to cede many of their low-level decision rights. Good leaders provide the right support and intolerance for partners to perform to their full potential. They facilitate a culture that is focused on delivering a superior client and employee experience. All these things matter.

A quick review of the high growth firms in Australia over the past decade confirms this hypothesis. Many have a strong, effective leader or a leadership group that have helped minimise growing pains and navigated through the Triangle. The words of the Bear Hunt, “they haven’t gone over it / they haven’t gone under it / they’ve gone through it.”

Not quite the life of Harvey Spector

In Articles, Commentary on 2 February 2019 at 2:40 pm

Full text of my op-ed published in the Australian Financial Review on 1 February 2019.

The Australian Financial Review December 2018 Partnership Survey is fascinating for what it shows and what it doesn’t show. On the surface it reveals overall market growth as a result of the Haine Royal Commission, major infrastructure projects, real estate investment, regulatory change, private client wealth transfer, litigation funding and class action defence. It also reveals the rapid ascent of the law divisions of the Big 4 to a total of 87 partners.

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However, the AFR Partnership Survey doesn’t show the names of four major firms that, for all intents and purposes, failed: Henry Davis York, Dibbs Barker, TressCox and Kemp Strang.

Paradoxically the latter firms weathered all the ups and downs over the past decades but failed in a rapidly growing market. Their demise can be traced to a combination of competitor aggressiveness, poor market focus and internal instability. The loss of key rainmakers to highly-acquisitive firms HWL Ebsworth had an immediate back-pocket impact on their high fixed cost business model. Profits took a further hit by a primary focus by some on commoditised banking, property and government work with a non-commodity low scale service delivery model. Coping with all these pressures with consensus-based decision-making significantly hindered rather than helped.

A broken talent supply model

Many of the law firms interviewed for the AFR survey indicated that they will be significantly increasing their graduate intake in 2019. The data revealed a rough ratio of 0.6 new graduates for every existing partner. The total of partners listed in the survey, plus the no-show Minter Ellison, is 3,560. At the 0.6 ratio we’re talking roughly 2,200 new graduates to be apprenticed at the elite level in 2019. Add another 1,000 for quality commercial and plaintiff firms and organisations not listed in the survey and we get a total of 3,200.

Australia’s 39 law schools produce around 8,000 graduates per annum. This means an immediate attrition rate of 60%. And 2019 is a boom year for graduate hiring.

Graduates then join our top law firms expecting to be Harvey Spector (or your favourite TV law hero) on Day 20 and find out that it’s not so glamorous. In fact, if one takes indicative employee experience data from Glassdoor.com.au, we see that many find it pretty average (ratings out of 5 for the top 5 firms):

·      HWL Ebsworth: 2.5

·      Clayton Utz: 3.6

·      King & Wood Mallesons: 3.1

·      Herbert Smith Freehills: 3.7

·      Norton Rose Fulbright: 3.4

Within three years of working in a major firm, a number of disillusioned trainees leave and seek employment elsewhere. This ultimately results in a shrinking talent pool of quality mid-level 3 to 7-year PQE lawyers.

Paradoxically, we have 60% over-supply of legal graduates but a significant shortage of trained lawyers. Surely, there must be a better, fairer and more sustainable way to supply top talent to our top firms?

Three strategic questions

There are three strategic questions have taken up thousands of partner decision-making hours across many of the firms listed in the AFR Survey in recent years:

·     Should we join up with a global firm?

·     Should we change our partner remuneration model?

·     How do we differentiate our firm?

Using partner numbers and growth as a proxy for success, the AFR survey reveals that both global and domestic firms are thriving. In the Top 20, we have seven globals and 13 locals (including Minters). It appears that there is a compelling argument that both models work.

The data indicates that there is no correlation with any particular partner remuneration model. Amongst the Top 20 firms we have strong individual performance-based models in firms like HWL Ebsworth and Mills Oakley, lock-step equal share models in firms Hall & Wilcox and Maddocks and hybrids like Allens and Baker & McKenzie.

If market differentiation was a critical success factor then one would expect three or four standout brands, like a Qantas and Virgin in airlines or Coles, Woolworth and IGA in grocery retail. The AFR survey reveals 54 brands with no obvious differentiation within broad peer groups. Given that many of the first listed are highly profitable it appears that there many more important factors that determine success than market differentiation.

In my view, firms would be far better off worrying less about globalisation, rem models and pursuing differentiation. The things that really matter are growing the pie through effective firm and practice leadership, nurturing a strong organisational culture, strategic focus and operational excellence.

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